Building an Exempt Market Investment | The Role of the Issuer
By: David Todd
On September 28, 2010, the Canadian Securities Administrators (CSA) formalized the application of Exempt Market Legislation and oversight through the use of National Instrument 31-103. Through this legislation, the Provincial Governments, working through their respective Securities Commissions, would more throughly monitor the sale of Investment Products in Canada that were Exempt from Prospectus.
The sales process of these investment products can be viewed as a chain of events or functions which must be adhered to before the product can be purchased, or invested into by the investor. The issuer begins this process by creating the investment opportunity to be eventually represented to the investor. Once the steps involved in creating the opportunity package have been completed, the product is then presented to Exempt Market dealers for possible distribution. The dealers are ultimately responsible to the commission for sufficient due diligence of the investment product. Once the Due Diligence has been completed and the product approved for sale, it is then made available to the Exempt Market Representative, registered with that specific dealer, for sale to investors.
The first steps in bringing an investment product to market are executed by the issuer. Within this lead position there are six steps that the issuer will normally execute, however, these steps are part of an overall process and not formalized by NI 31-103, or scrutinized by a Commission.
Step 1: The Product ‘In Development - Exit’ is planned
In this very first product planning phase, the issuer will strategically develop an investment opportunity. This will include the ‘In’ phase which determines when, where and how an investor will have the opportunity to ‘get into’ the investment. Typically this phase can last several years and will be finalized through the full financial materialization of the Offering Memorandum’. The development of the investment opportunity can vary greatly depending on several factors including: vertical market application, window of opportunity, and macro development plans of partnerships or other organizations not associated to the issuer or its partners, such as city development plans, for example. The final phase is commonly referred to as ‘the exit,’ or the period of time when all investors exit the opportunity. This phase can happen all at once (a building is sold) or over several years (parcels of land are sold to home builders). With this strategic plan intact, the issuer then proceeds to step two.
Step 2: The Analytics / Partnerships / Strategy Phase
With step one completed, the issuer now enters into a phase of overlaying the analytics, the financial model, and the required associations or partnerships and their associated and integrated financial models and the overall execution strategy of the investment. This is where the foundation of all the required steps and analysis are laid down and agreed to by the issuer and their partners.
Step 3: The Offering Memorandum (OM) is written and vetted
This phase is the technical writing of the OM which provides disclosure of the investment. The OM is the most important document in the process, and reflects all the parts of the investment which the investor needs to be made aware. This would include the overall strategy, the partnerships included to execute the strategy, the financials of the corporations involved and the financial expectations of the investment to the Issuer, its partners and the investor. OMs are typically large documents which resemble a full corporate business plan. Holding the position as the main document of the investment, the OM will be finalized with law firms, analyzed by distributers, studied by representatives and mandatorily presented to the investor.
Typically as well, the law firm will have expertise in the exempt vertical market and understand the implication of its document structure, wordings, and overall disclosures of the investment, to the commission, the dealership and the investor.
Step 4: The OM is filed with the Provincial Securities Commission(s)
This step firstly involves a strategic decision on the part of the issuer concerning which provinces of Canada the OM will potentially be represented in the distribution for resale to the investor. Exempt Market legislation is provincially regulated and differences exist between provinces. Therefore, depending on the location of the issuer and the investment opportunity, varying strategic decisions may be made. For example, a land developer based out of Saskatoon, may choose to have the OM only represented in that province. Typically, OMs are frequently filed with securities commissions in Canada’s western provinces due to favorable investor eligibility rules and the relative wealth of the population, and their corresponding ability to invest. Also, an issuer may wish, for strategic reasons, to offer the sale of their investment product in Quebec. Under the definitions of the ‘Eligible Investor’ for Quebec, the OM and associated processing paper work must be in French. If the OM and associated documents is not in French, the product may still be invested into by Quebec residents providing that they are able to invest under other exemptions known as Accredited Investor or Friends and Family, and that they sign a document stating that they understand that all written representation will be in English.
Step 5: The OM is presented to the EMD
Once the OM has been written, vetted through law firms, and filed with provincial securities commissions, the issuer must then present the OM to distributors for possible placement on the distributors shelf as ‘one of’ the products for sale. During this process, the entire OM will be reanalyzed by the distributor and often a third party analyst who will rate the investment on a variety of levels. Assuming all of these processes have been executed and completed, the issuer will then enter into the formal sales phase. During this phase the issuer will typically train the representatives on the key points of the investment and will support the representatives’ ongoing sales efforts through product presentations and the provision of a deeper level of understanding, for the investor, as required.
Step 6: The OM presented to investors
Specifically, under provincial securities commission’s legislation in Canada, the OM must be presented to the investor and the investor must sign off that they have received the OM from the dealing representative. This exact step does not involve the issuer and is the responsibility of the distributer and their representatives. However, once complete, the representatives will present all appropriate paperwork to the issuer for processing and filing. The issuer will then accept the investment dollars into its organization and begin the process of financially ‘consuming’ the OM and deploying the investment dollars to accomplish its strategic goals as it now moves forward through the deployment phase towards the exit.
Therefore, ‘The Role of the Issuer’ within the Canadian Exempt Market is a key role in bringing investment opportunities to market. It is the responsibility of the issuer to ensure that all of the above steps are completed in sequence and that the details within each step are executed completely. The governing document, the Offering Memorandum, represents the entire business plan of the investment opportunity and is the document by which everyone, from the issuer to the investor, will be held accountable. Within Canada other exemptions exist which does not require all of the above steps and processes, however, the Offering Memorandum Exemption for the Eligible Investor, as provincially regulated, reflects the vast majority of interactions within the retail Exempt Market.